The Lure Of Frontier Markets

Via TodayOnline, an article on the growing appeal of frontier markets:

With Europe sinking and the US economic recovery faltering, investors who want something more than 0.1-per-cent interest on savings accounts have understandably been looking for alternatives to developed markets.

Over the past couple of years, some of them have invested in emerging markets instead. As these, too, have faltered – with slowing growth in China and policy paralysis in India being only two regional examples of uncertainties that have caused markets to drop – some of these markets have also lost their allure.

For investors who want greater returns, then, some investment experts are suggesting frontier markets as a growing opportunity.

While frontier markets – which are marked by low market capitalisation and liquidity – have often been perceived as too small or too risky, legendary investor Mark Mobius told TODAY that nine of the top 10 fastest-growing emerging markets for the entire decade from 2001 through 2010 were frontier markets.


The range of frontier markets is vast – from Nigeria and Botswana in Africa, Colombia and Argentina in Latin America, to Kazakhstan and Kyrgyzstan in Central Asia and Bulgaria and Romania in Far East Europe.

Simply hearing Mr Mobius rattle off the names of these countries where his fund owns shares is like going on a whirlwind worldwide tour. He’s even gone into Egypt and Morocco.

Closer to home, Mr Mobius, Executive Chairman of Templeton Emerging Markets Group, mentioned Sri Lanka, Pakistan and Vietnam as some of the markets in Asia where he is investing.

In a recent interview, he said he was quite surprised by investors’ enthusiasm for frontier markets.

“We started about three years ago and now we’ve got US$1.2 billion (S$1.53 billion) in frontier markets, which is amazing. The risk appetite is definitely there, and people are willing to take the risk to get higher returns. They realise that a 1-per-cent return is not going to be very good for their financial health,” he said.


Of course, not everything about frontier markets is positive. As Morningstar analyst Gregg Wolper said some time ago, in perhaps an understatement, the risks are “considerable”.

Frontier markets aren’t even as liquid as emerging markets, let alone developed markets, so trying to sell shares during a downturn could be difficult. Lax regulations and shareholder or legal environments can be even dicier than those in Russia or China. Investing in these markets, then, is not for the timid.

In March, Mr Oliver Bell, from Baltimore-based T Rowe Price Group, said of Egypt: “We want to buy the stocks, but the economic politics are so uncertain you could lose half your money just on the currency.”

In Sri Lanka, where the stock market has plunged to a near 23-month low, Reuters has said investors are still concerned Indian rupee volatility and the interest rate outlook could drive the market down even further.

Mr Mobius agreed that frontier markets have risks. Along with local risks, he said they aren’t immune from global economic concerns.

The euro-zone crisis has led European banks to pull back from emerging markets, for example, so frontier markets may have difficulty getting financing in the short term.

Investing is “a risk-reward thing”, Mr Mobius said. But even as he acknowledged the risks, he said “we’re continuing to invest”.


Argentina is one example where certain companies offer potential opportunities, he said, despite local and global turmoil.

Even though there is an uncertain political situation and talk of nationalisation, he said companies like Tenaris are world-class and politicians are unlikely to touch them. And, in any event, much of their assets are outside Argentina. Prices have come down so far on fears about the market that shares are actually more attractive.

While Myanmar is another place he’s looking at, he said it will take time and it may be too early to go in.

Mr Mobius isn’t alone in seeing frontier markets as attractive.

Mr Conrad de Aenlle said in The New York Times just last month that some investment advisers contend that many of these so-called frontier markets, especially in Africa, offer similar opportunities to the fledgling markets of earlier generations.

If anything, they’re more worried about missing “the next big thing” by investing too late. And six of the 11 markets Citibank identified as likely to have particularly strong growth rates, in its recent Global Growth Generators: Moving Beyond “Emerging Markets” and “BRIC”, were frontier markets.

Admittedly, investing in frontier markets is not for conservative investors or someone who can’t afford to lose a little of the capital they put in. But for those willing to take that extra risk to get higher returns, it may actually be a good time to invest.

This entry was posted on Friday, June 29th, 2012 at 9:37 pm and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.